Annette Bongardt

EMU and Sustainable Integration

Abstract This paper considers what will be required to make Economic and Monetary Union (EMU) sustainable following the successive crises of recent years. It starts by laying out the policy benchmark, namely the successive ‘President Reports’ produced by EU institutions. It then suggests three dimensions of sustainable integration relevant to EMU, namely the pursuit of sustainable growth, the need to take into account what we call ‘varieties of modernisation’ and the ‘ownership’ of democratically sustainable reforms. It then evaluates the recasting of EMU governance against the benchmark of sustainable integration.

EMU and Structural Reform

This chapter considers the role of economic and structural reform in EMU, starting with the uneven governance of EMU’s economic and monetary parts set out in the Maastricht blueprint. It examines how soft coordination under the heading of the Lisbon Strategy fared before the sovereign debt crisis. It proceeds with analysing the changes that the eruption of the sovereign debt crisis in 2010 brought about, looking into the Europe 2020 Strategy, the Euro Plus Pact, and the implications of the emergence of market pressure and conditionality. In this context the special case of Greece is considered. Adopting a forward-looking perspective, the chapter also sheds light on structural reform needs from the point of view of a durable crisis exit.

Economic Governance and Sustainability

This chapter deals with sustainability and economic governance in the European Union (EU). It sets out to map the evolution of the literature on the subject within the economics of European integration. The recent financial and economic crisis as well as the sovereign debt crisis and the global warming issue have come to focus attention on EU environmental and economic sustainability concerns and on the need for the delivery of economic results of the EU governance set-up.

A Qualitative Change in the Process of European Integration

The UK triggered Brexit, as the outcome of a democratic process that involved a referendum, repeated confirmations in parliament by overwhelming majorities and a general election. For the EU, Brexit marks a qualitative change in the nature of European integration. It has opened the door for permanently discontent member states and also for other outliers to leave the club, which as we argue is a very positive development, as member states need to contribute to the common good and be committed to shared values. Allowing for special deals or concessions with privileges that only accrue from membership or for too flexible a EU (to accommodate very different preferences) would undermine the European integration project in the long run. It follows that the EU cannot give in to a soft Brexit bespoke agreement, as that would mean in practice free riding on the EU: the UK would maintain most of its EU membership advantages without the obligations (sharing sovereignty) and the commitment to the project of a member. The EU can only work and deliver if it is cohesive, that is, if it manages to build a strong political core (the Eurozone) to which differentiated integration can be anchored.

EMU as a Sustainable Currency Area

EMU’s governance framework was incomplete at its inception. Its institutional fragilities allowed for the building up of competitiveness and fiscal disequilibria in some Member States during its first 10 years and left the Eurozone unprepared to cope with the sovereign debt crisis. While some of those weaknesses have been addressed in response to the crisis EMU’s governance framework remains incomplete to date and therefore vulnerable to adverse market and political-economy pressures. This chapter argues that EMU—or at least the membership of individual countries—will not be sustainable without national adjustment capacity and willingness to implement economic reforms. Those reforms are also a pre-condition for promoting sustainable growth and hence a credible crisis exit strategy. Although EMU’s resilience could still be guaranteed through other mechanisms in the absence of sufficient national adjustment capacity, notably a banking union with an orderly state bankruptcy regime, even if feasible it would mean a rather different model of European integration.